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Meaning of Demand
Meaning and Definition of Demand According to Benham: The demand for anything, at a given price, is the amount of it, which will be bought per unit of time, at that price. According to Bobber, By demand we mean the various quantities of a given commodity or service which consumers would buy in one market in a given period of time at various prices. Requisites: Desire for specific commodity. Sufficient resources to purchase the desired commodity. Willingness to spend the resources. Availability of the commodity at (i) Certain price (ii) Certain place (iii) Certain time.
a. b. c. d.
Kinds of Demand
1. Individual demand 2. Market demand 3. Income demand - Demand for normal goods (price ve, income +ve) - Demand for inferior goods (eg., coarse grain) 4. Cross demand Demand for substitutes or competitive goods (eg.,tea & coffee, bread and rice) Demand for complementary goods (eg., pen & ink) 5. Joint demand (same as complementary, eg., pen & ink) 6. Composite demand (eg., coal & electricity) 7. Direct demand (eg., ice-creams) 8. Derived demand (eg., TV & TV mechanics) 9. Competitive demand (eg., desi ghee and vegetable oils) 10.Demand of unrelated goods
Demand Schedule
Demand Schedule: a tabular presentation showing different quantities of a commodity that would be demanded at different prices. Types of Demand Schedules
B 45 30 20
C 40 38 30
1 2 3
50 40 35
20
15
25
60
Demand Curve
The Graphical Representation of Demand Schedule is called a Demand Curve. It is of two types:
Individual DC
Y Price Flatter
Market DC
Less Flatter
Y Price
More
O Demand
Demand X
Figure 2.1 Market demand for tomatoes Demand, the assumed inverse relationship between price and quantity purchased, can be represented by a curve that slopes down toward the right. Here, as the price falls from $11 to zero, the number of bushels of tomatoes purchased per week rises from zero to 110,000.
Figure 7.2 Market demand curve The market demand curve for Coke, DA+B, is obtained by summing the quantities that individuals A and B are willing to buy at each and every price (shown by the individual demand curves DA and DB).
Demand Curve
Movement along demand curve Vs. Shift in demand curve: Distinction between change in quantity demanded and change in demand. A. Change in quantity demanded When quantity demanded changes ( rise or fall ) as a result of change in price alone, other factors remaining the same. Contraction/fall in quantity demanded Extension/Rise in quantity demanded The change is depicted/ represented by the movement up or down on a given demand curve. This does not require drawing a new demand curve.
Figure 2.2 Shifts in the demand curve An increase in demand is represented by a rightward, outward, shift in the demand curve, from D1to D2. A decrease in demand is represented by a leftward, or inward, shift in the demand curve, from D1 to D3.
1. 2. 3.
EXPLAINERS: Why demand curve slopes downwards? 1. Income effect 2. Substitution effect
Law of Demand
Exceptions: Inferior goods Articles of snob appeal. (exception: Veblen goods, eg., diamonds) Expectation regarding future prices (shares, industrial materials) Emergencies Quality-price relationship Conspicuous necessities. Ignorance Change in fashion, habits, attitudes, etc.. Importance: Price determination. To Finance Minister To farmers In the field of Planning.
Market Research and Law of Demand 1. The more confidence a person has in price information as a
2.
3.
4.
5. 6.
predictor of quality, the more likely hell be to choose a high priced, rather than a low-priced item. A person who perceived himself as experienced in purchasing a product will generally choose a low-priced item, but an inexperienced person will select a high-priced one. A person who selects a high-priced item will (i) believe its more difficult to judge product quality, and (ii) feel he has less ability to make accurate quality judgments than one who chooses a low-priced item. A person who purchases a high-priced product would perceive large quality differentials. He would also feel that it is risky and uncertain to go in for a low-priced product. Business executives also disbelieve that the consumer is rational. (Eg., Yale the under priced lock) Purchasing behavior of the consumer is mostly repetitive.
P
P1 A
P
B
D1 D2
P2
Q1
Q2
D1
D2
Determinants of Demand
Things other than price that cause the whole curve to shift
Determinants of Demand
inferior goods
(b) U.S. negotiates a deal w/ China to trade hot dogs for egg rolls?
(e) the MWU threatens a strike if owners fail to meet their demands?
Elasticity of demand
Definition: Elasticity of demand is defined as the responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends. These variables are price of the commodity, prices of the related commodities, income of the consumer & other various factors on which demand depends. Thus, we have Price Elasticity, Cross Elasticity, Elasticity of Substitution & Income Elasticity. It is always price elasticity of demand which is referred to as elasticity of demand A.Price Elasticity Measures how much the quantity demanded of a good changes when its price changes. Or It may be defined as Percentage Change in Quantity demanded over percentage change in price
1. 2. Postponement of consumption 3. Proportion of expenditure (needles: inelastic; TV: elastic) 4. Nature of the commodity (necessity vs. luxury; durability/reparability eg., shoes) 5. Different uses of the commodity (paper vs. ink) 6. Time period (elastic in the long term) 7. Change in income (necessaries: inelastic; milk and fruit for a rich man) 8. Habits 9. Joint demand 10. Distribution of income 11. Price level (very costly & very cheap goods: inelastic)
Price Elasticity
Price Elasticity Elastic Demand or more than 1 When quantity demanded responds greatly to price changes Inelastic Demand or less than 1 When quantity demanded responds little to price changes. Unitary Elastic When quantity demanded responds equally to the price changes. Perfectly inelastic or 0 elastic demand Perfectly elastic or infinite elastic demand
Economic factors determine the size of price elasticity for individual goods. Elasticity tends to be higher when the goods are luxuries, when substitutes are available and when consumer have more time to adjust their behavior.
Points to Remember: We drop the minus sign from the numbers by treating all % changes as positive. That means all elasticitys are positive, even though prices and quantities move in the opposite direction because of the law of downward sloping demand. Definition of elasticity uses percentage changes in price and demand rather than actual changes. That means that a change in the units of measurement does not affect the elasticity. So whether we measure price in Rupees or paisa, the price elasticity stays the same.
Income elasticity
Types: Zero Negative Positive (i) low (ii) unitary (iii) high
Empirical evidence suggests that income elasticity falls as income rises. Income elasticity and business decisions 1. If ei is >0 but <1, sales will increase but slower than the general economic growth; 2. If ei is >1, sales will increase more rapidly than general economic growth Corollary: in a growing economy while farmers suffer as their products have low income elasticity, industrialists gain as their products have high income elasticity.
Cross Elasticity: A change in the demand for one good in response to a change in the price of another good represents cross elasticity of demand of the former good for the latter good. If two goods are perfect substitutes for each other cross elasticity is infinite and if the two goods are totally unrelated, cross elasticity between them is zero. Goods between which cross elasticity is positive can be called Substitutes, the good between which the cross elasticity is negative are not always complementary as this is found when the income effect on the price change is very strong.
1.
Perfectly Elastic
Y Ed = p
d1
2. Perfectly Inelastic
Y
p1 p
Ed = 0
3. Unitary Elastic
Y
p1 p
Ed = 1
d1
Y
p1 p
Ed > 1
d1
Y
p1 p
Ed < 1
d1
Figure 7.3 Elastic and inelastic demand Demand curves differ in their relative elasticity. Curve D1 is more elastic than curve D2, in the sense that consumers on curve D1 are more responsive to a given price change (P2 to P1) than are consumers on curve D2.
Figure 7.4 Changes in the elasticity coefficient The elasticity coefficient decreases as a firm moves down the demand curve. The upper half of a linear demand curve is elastic, meaning that the elasticity coefficient is greater than one. The lower half is inelastic, meaning that the elasticity coefficient is less than one. This means that the middle of the linear demand curve has an elasticity coefficient equal to one.
As the price falls from P3 to P2, the quantity demanded in the short run rises from Q1 to Q2. However, sales build on sales, causing the demand in the future to expand outward to, say, D2. The lower the price in the current time period, the greater the expansion of demand in the future. The more the demand expands over time in response to greater sales in the current time period, the more elastic is the long-run demand.
1. Percentage or Proportionate Method = Percentage change in demand or; Percentage change in price = Proportionate change in demand Proportionate change in price 2. Total Outlay (Expenditure) Methods TO=TQ * P ; where, TO=total outlay; TQ=total quantity; P=price of the commodity
3. Geometric (Point) method at any given point on the curve = lower segment of demand curve upper segment of demand curve
The pyramid orders human needs by broad categories from the most prepotent needs on the bottom to lesser and lesser prepotent needs as an individual moves up the pyramid. According to Maslow, an individual can be expected to satisfy her needs in the order of their prepotence, or will move from the bottom of the pyramid through the various levels to the top, so long as the individuals resources to satisfy her needs last.
Figure 3.5(a) Demand, price, and need satisfaction The extent to which needs are satisfied depends, in the economists view of the world, on the nature of the needs demand and its price. Physiological needs may indeed be more completely satisfied than other needs, but that may only be because physiological needs have relatively low prices (panel (a)). But then, as shown in this figure (panel (b)), the price of the means of satisfying physiological needs might be higher than the prices of the means of satisfying safety and love needs.